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The US Federal Reserve will slash its growth forecasts and predict higher unemployment when it releases updated economic projections this week.

The Fed will release the latest forecasts made by members of its rate-setting open market committee on Tuesday, alongside the minutes of their November meeting, giving a complete picture of why they launched a new $600bn round of asset purchases....

FOMC members have made particularly aggressive upward revisions to their unemployment forecasts, with a large number now predicting that it will still be 8 per cent or above at the end of 2012, compared to the 7.1 to 7.5 per cent that they forecast in June.

“Because I expect hiring to strengthen only gradually, the unemployment rate is likely to remain elevated for quite some time. In fact, I do not expect it to fall below 8 per cent before 2013,” Sandra Pianalto, president of the Cleveland Fed, said in a speech last week.

Let's suppose that unemployment remains elevated into 2012, around the level that the Fed predicts. What will this mean?

It's hard to say. We know for sure that the economy influences political outcomes, but it is hard -- very hard -- to isolate the effect of any one variable. Statistically, this makes sense. Economic variables tend to be closely related to one another, and there are really just a handful of presidential elections where records are available. "Fuzzy factors" plus "small n" equals...uncertainty!

More by Jay Cost

Unemployment is a great example. We know that unemployment matters in presidential election outcomes. The Great Depression saw unemployment exceed 25 percent, which is what prompted the public to swing into office a progressive Democratic majority under FDR, which in turn proceeded to rewrite much of the social contract between government and citizen. If unemployment had been, say 5 percent, at the time of the 1932 midterm, would Hoover have lost? No way.

And yet, look at the statistical relationship between unemployment in November of election years and the incumbent president party's margin of victory/defeat.

There is no statistically significant relationship there whatsoever. Why is that? Again, it's hard to say. It'd be foolish to write off the idea that unemployment has no effect, considering the example of the Depression. And a lack of statistical significance doesn't mean there is no relationship, only that the data set does not point conclusively toward one. And if you look at some of the elections on the left-hand side of the graph, you'll notice they tend to have funky qualities to them. 1952 saw the immensely popular Eisenhower running for office. In American history, just three candidates have enjoyed that level of credibility prior to taking office -- Washington, Jackson, and Eisenhower. It's therefore quite problematic to compare 1952 to, say, 1988. What's more, the elections of 1948, 1968, and 2000 all saw spoiler candidates, each of which robbed the incumbent party of votes. If we dropped these four elections, we'd have a statistically significant fit between unemployment and election results.

But are we accounting for outliers, or just engaging in special pleading to redeem the importance of unemployment? Who knows! When you get right down to it, we only have 16 observations here (1948 to 2008), and that's not really enough to say much of anything of interest, at least via statistics. Imagine that a buddy gives you a rigged coin that will hit on tails 60 percent of the time. In the long term, you're going to see tails more than heads, but after just 16 observations, you might actually see more heads than tails. In fact, the chances of getting 8 or more heads, even with a coin tilted to the tails side, is not too shabby -- about 28 percent. In other words, we could very easily wind up with a "false negative," calling a coin fair when it is in fact rigged.